Rhetoric enters into economics frequently at the junctures
of alternative government policies and debates grounding competing theories of
unexpected events and prudent solutions. When economies turn in widely
unanticipated directions, critical discussions arise to spark questions about
the legitimacy, power, and correctness of policy response.

In October 1932, there appeared in The Times of London a
series of brief letter exchanges signed by John Maynard Keynes and Friedrich
August von Hayek (along with some of their associates) in which alternative
explanations were defended about the causes of economic activity. Those
explanations were grounded in macro- and micro-economics, which in the terms of
the 1930s were contested as trade cycle or monetary theories (Rizzo,
2009). Also at issue, however, was a choice between alternative
strategies of political economy. Nineteen thirty-two appeared to be
a time of nascent recovery from the effects of falling equity values, but also
could be seen as the beginning of a new era of trade protectionism and monetary
contraction. One policy choice was for governments to distribute
tax or printed money to citizens in the form of unemployment insurance or
guaranteed employment programs to supplement private spending. Another was
for governments to exercise restraint in borrowing and spending and let private
capital adjust economies to new productive levels by securing good investments
over time. While the subsequent decisions of the British government
conformed to neither choice unequivocally, the events of the Great Depression
that followed have at various times been appropriated by Hayek and Keynes’
successors as evidence that the theoretical arguments of one or other have been
vindicated by collective experience.

The present day is another time in which theoretical controversy
and alternative practices are conjoined. Named by some as “the Great
Recession,” the period that began in 2008 has seen accelerating rates of
defaults on loan repayments, job layoffs, financial institutional distress, and
speculative shortselling of sovereign debt. But this moment has also been
articulated as the initiation of a new process of recovery. “The news media are
singularly lacking in any explanation for the recent resurgence of the world
economy beyond the improvement in leading indicators, such as stock market
prices and retail sales numbers” (Akerlof & Shiller, 2010, vii).

Conflicting appearances spark economic uncertainty, and when
security falls, a boom time for economic debates flourishes. Contestation over
the relation between theory, policy and practice articulate different,
competing ways of envisioning ideal relationships among economics, markets, and
state intervention as well as dramatizing the hazards of turning toward greater
hazard. In such debates, the previous positions are revisited and
resurrected to lay on the table argument, informed authority, and
precedent. Thus, the 1932 debate between Keynes and Hayek has been
invoked recently, in fact, not so much to recoup places of agreement or unique
contributions to re-envisioning the relationship between theory and practice as
to polarize positions and situate the dispute within a left-wing or right-wing
policy presumption. Within such frameworks, advocates now jockey for advantage
by declaring:

they are faithful followers of the doctrines of Hayek
or Keynes,

that the times demand strict adherence to true
principles, and

that cataclysmic outcomes await those who hesitate or
chose the other side.

Gerald P. O’Driscoll Jr., a former vice president of the
Federal Reserve Bank of Dallas and now a senior fellow at the Cato Institute,
for example, points to “newly discovered letters” from The Times of London (MacGregor et al., “Private Spending”, 1932a; Gregory et al.,
1932) in order to insist that if Hayek were alive today, he would demand that
efforts at economic stimulus be abandoned and that the global trading system be
reinvigorated by removing all remaining barriers to open trade. Even if
Keynes were right—a claim admitted only as a counterfactual in O’Driscoll’s
editorial-- President Obama, says O’Driscoll, is not following either Hayek or
Keynes because he is “demonizing business and creating regime uncertainty
through new programs and costly regulations,” which engenders a loss of
confidence not part of either economist’s project. On the other
side, Paul Krugman, Nobel Laureate and economics professor at Princeton, has
reviewed the “dueling letters” on his New York Times blog. He describes
Hayek’s claim that barriers to trade and capital movement were preventing
recovery as “crazy” (Krugman, 2010). Krugman credits Keynes with having
worked out almost all of the policy implications of The General Theory of
Employment, Interest, and Money (published in 1936) by 1932, including the
insight that both higher private and higher public spending expand employment
in a slump. Krugman expresses regrets that a debate concluded is now being
restaged.

We rejoin the debate between Hayek and Keynes, in part, to repair
the binaries and polarities within which theorist has been cast by subsequent,
polarized advocates of political economy. Within the larger contexts of
their 1932 exchange, it turns out that Hayek is not a right-wing hero, any more
than Keynes is a liberal managerial technician, removed from institutional
constraints. Of course, economic theories can be read as a linear,
progressive history of ideas. The situated qualities of argument are shaved
away to leave the form of causal order in defining the basic, underlying
principles of exchange. Such foundational work yields the promise of
control--with ever greater degrees of power and reliability—over markets and
economic activity. Older views, inadequate to the broadening scope and
narrowing precision of advancing theories, then, can be distilled to essence,
particulars of context abandoned, and the specifics of argument consigned to
the waste bin of history without loss. That is not, however, our reading
strategy. We prefer to begin from the assumption that humans are
self-constituting, and therefore economic theories can be re-popularized in a
new age, and theoretical controversies can reappear. Different groups
engage in appropriation or critique of those theories to gain argumentative standing
and to strive for advantage. Critical engagement with situated texts is
necessary to repair appropriations of theory that unproductively curtail and
limit the range of rhetorical aspects of theoretical disputes that respond to
mixed and self-constituting rather than essentialized and purified
polarizations to claim public authority.

In this respect our aim is to extend other work of our colleagues
that appears in this edition of the POROI journal. McCloskey and
Lyne in their dialogue, and in their articles Ramos and Mirowski, as well as
Depew, look at the rhetoricity of practices internal to the texts of social
discourse. Each of our strategies follows a parallel track, developing
positions, putting them in rhetorical terms, and creating new directions for belief
and action. In the following review, we set the context for the
articulation of economic debate in the uncertain transitional political economy
during a turn from the market values from war time savings to domestic
consumption; then, explicate the positions of Keynes and Hayek within this
uncertain context of transition during the Depression; and, finally reconstruct
and recover Hayek's position in relation to contemporary debates in the
articulation of economic value. The close reading of the 1932 debate in
context thus enables a broader recovery of Hayek's theories of economy in
relation to contemporary practice. To be sure, oppositional grounds
remain at the level of the means of intervention and the sources of uncertainty
between Hayek and Keyes; however, there is sufficient common grounds between
these modern economists to offer grounds for a consensus on crucial public
policy-regulating practice and to resist polarization in the interests of
partisan power and expert authority.

Seven years before his date of destiny with Adolf Hitler
and before he declared “peace in our time,” Neville Chamberlain assumed the
post of Chancellor of the Exchequer when the Conservative coalition ousted the
Labor Party from voting control in Parliament. The UK had experienced
hard economic times for several years, and the members of the Labor Party
Cabinet were unable to articulate a theory and practical plan for reversing the
downturn. The victorious Conservative coalition insisted that the first
step was to put in place new fiscal austerity measures. The supplementary
budget proposed on September 10, 1931 combined a 35 million pound cut in
unemployment benefits and public sector wages, a refinancing of 22 million
pounds of War Loans to take advantage of lower interest rates, and a tax
increase of 40 million pounds. Chamberlain worked to push the proposal
through the political process, and announced on April 19, 1932 that the budget
had been balanced with a small surplus (Morton, 1943, 70-71). On the
basis of this accomplishment, Time Magazine considered Chamberlain
(“Britain’s Strong Man”) for Man of the Year 1932, although the award eluded
him until 1938. But Chamberlain recognized that the tax increase was
alienating tax-paying supporters of the Party and decided to leave open some
hope for future tax relief connected to further budget cuts. In a May 10,
1932 speech at the Bankers’ Dinner he observed that taxpayers were “crying out
for still further efforts at economy,” but that “real effective relief to the
taxpayer” would require a more comprehensive debt reduction pact than was currently
being contemplated (Morton, 1943, 71). During the same period, however,
Chamberlain also introduced a 10% general tariff in an effort to rectify an
adverse balance of trade by diminishing imports and encouraging domestic
manufactures, which became effective on March 1.

There is support, then, for the belief that Chamberlain carried
out an economic policy during a world recession that placed the burden of
adjustment primarily upon ordinary UK citizens by reducing public employment
and welfare payments, decreasing the interest rate on war bonds, and increasing
taxes and the prices of imported goods. How was this onerous set of
impositions justified? An examination of Chamberlain’s exemplary June 30
address to the House of Commons on war bond conversion, which appears to have
stimulated the series of London Times letters to the editor beginning on
July 5 and so leading to the Keynes-Hayek exchange in October, suggests that
the onerous was grounded in appeals to the honorable. Chamberlain
appeals, for example, to the “good sense and patriotism” of those holding war
bonds. The good sense consisted of an understanding that the high rate of
interest (5%) payable on the bonds was greater than comparable rates of return
on other securitiesand that these high-interest war bonds depressed
both competing investments and trade. There was also a negative inducement
to good sense.The government would find other ways to extinguish
the debt if the bondholders did not agree to the conversion. The
invocation of patriotic duty was an extension of government appeals during
wartime encouraging British citizens to put their surplus funds in war bonds so
that the government could commandeer resources needed for the war effort.
In the current situation, “economy is an urgent matter, and this scheme,
effecting so great a reduction in our interest charges, is an essential element
in any economy proposals” (Chamberlain, 1932b). Britain’s budget and
trade problems, then, justified wartime measures and, in particular, called
upon consumers to tighten their belts and donate the surplus to the government
at lower rates. The appeal was effective; 92% of war bondholders accepted
the lower interest rates (although even the new interest rate of 3.5% was
better than what the average investor could obtain elsewhere) (Leaviss, 2010).

Chamberlain’s rhetorical strategy seemed to participate in a
productive conflation of “economy” as a financial entity or process with
“economy” conceived as concern for or means to reducing government expenditure
or “economizing.” In a July 11 appearance before the House of Commons
Chamberlain attacked an opponent on the “question of economy”:

I think, however, that the purpose of to-day's discussion
was understood to revolve around the question of economy. The hon. and learned
Member for East Bristol said that economy was the reverse of the right policy
for the Government of this country, from which I conclude that the converse is
true, and that in his opinion the right policy for this country is one of
extravagance. (Chamberlain, 1932a).

From this perspective, the role of political economists
must be to preserve the economy by economizing on government
expenditures. Austerity and prosperity are coincident.

The financial austerity program was accompanied by continuation
of the monetary contraction the UK had experienced while the government
preserved the gold standard during the economically difficult period between
1929 and 1931. In spite of the UK government’s decision to abandon the
gold standard in mid-1931, the earning assets of London clearing banks
decreased by an additional 3% between September 1931 and May 1932 (Morton,
1943, 47). They did so perhaps in part because in response to the
decision to abandon the gold standard the Bank of England raised the discount
rate from 4.5 to 6% out of a fear of inflation. On February 18, the Bank
began to reduce the discount rate, eventually reaching 2% on June 30. But
by then the short-term economic damage had been done. Furthermore,
Chamberlain made a decision to begin a policy of “quantitative easing” in May
as a way to create “cheap money” that would be necessary to help finance the
war bond conversion program. But “quantitative easing” did not guarantee
increased business investment because during the war bond refinancing period
(June to September 1932) private investors were prohibited from issuing new securities.
Investment was further inhibited by the uncertainty as to whether war bond
refinancing would be sufficient to achieve its goals (Morton, 1943,
250-251). Thus, although UK banks began to buy government securities at a
rapid rate thereafter and liquidity increased substantially in 1933, the
combination of fiscal austerity and discount rate increases in mid-1932 seemed
to promise yet more deflation.

It was against this background that on July 5, 1932,TheTimes of London published a letter to the editor signed by 41 prominent
economics professors across the UK, including Keynes. The letter blamed
“the great fall in wholesale prices” since 1930 for the most serious evil of
the economic crisis. Although some prices can adjust downward as well as
upward in response to supply and demand changes, it was claimed, other prices
were “relatively inflexible,” thereby creating “serious maladjustments
throughout the economic system.” Those prices that are adjustable, then,
need to be raised to where they were before the crisis began. This could
be done by private spending, monetary easing, tax rebates, and public
investment.

The choice to emphasize private spending on the list of actions
needed to achieve re-inflation was part of the letter’s effort to reverse the
equation of private austerity with the appeal to patriotism that had worked so
well for Chamberlain. Under the heading “Fresh Money for Spending,” the
letter exhorted private individuals and institutions to assist “by spending
money according to their capacity.” The sentence following this passage
is explicit about how presumptions about capacity to spend should be set:
“In cases of doubt, the patriotic motive should weigh on the side of
expenditures rather than economy.” Finally, the government should
alleviate the sense of uncertainty that was provoking public fears of inflation
by declaring its commitment to this new policy in advance, and not use
re-inflation as an excuse to engage in competitive devaluation of the pound,
which would worsen the world situation (Allen, et al., 1932).

More letters published in The Times of London on July 7,
1932 took a different tack. They recognized and called out the effort to
change the existing presumption in favor of economy in the sense of
economizing. They mustered once more the claims about the effects of the Great
War on postwar British economic resources, adding to that patriotic invocation
the uncertainty about the ultimate status of British war debt to the United
States, which had been suspended since 1931. The public must not
“relax its sense of corporate gravity and launch out on a course of what,
outside of seminars for optimistic undergraduates who know the otherworldliness
of their teachers, may be taken for an authorized and altogether indulgence of
their private tastes and capacity for wheedling loans at interest out of bank
managers” (Newbold, 1932). Another letter insisted that no
“representative body of opinion” would respect re-inflation in light of the
psychological danger of “fear and uncertainty always attending suggestions of
inflation” (Coxall, 1932). These opinions, insulting as they might seem
to prominent economists, were in line with the official editorial position of The
Times of London, which continued to publish essays in support of “strict
economy” and “wise spending” over the next few months.

Nevertheless, the notion that it might actually be the patriotic
duty of UK citizens to spend rather than to hoard money or return funds to the
government had been planted, and its seeds sprouted further missives at the
conclusion of the War Loan conversion program in early October. A World
War I RAF pilot, P. W. Petter, wrote a letter that appeared on October 7 on how
the British government’s success in the war loan conversion program constituted
a justification for a national effort to increase private spending, with
possible supplementation from public expenditure (Petter, 1932). C. H.
St. John Hornby, a prominent private book publisher, placed a letter on October
11 that agreed with Petter that “wise spending” by individuals is that which
employs as many people as possible and called upon economists to draw up a
scheme which would make such a determination. Hornby makes reference to
the persuasive effect that the previous phrase regime of “economy” had upon
private spending:

So much has been written and spoken about economy
during the past 12 months that most people seem to be imbued with the idea that
they are performing a public service by buttoning up their pockets, whether
they have money to spend or not . . .Words are dangerous things, and not the
least dangerous is the word “economy” in the mouths of those who do not realize
its full implications (Hornby, 1932).

After citing the July 5 letter, which he did not feel safe
to sign, Oxford professor of political economy D. H. Macgregor continued that
letter’s argument in an October 13 submission by co-opting the force of the
word “economy” by differentiating its meaning from “parcimony” [sic] to
associate economy with the project of re-inflation, by means in part of public
expenditures:

Economy has two opposite, waste and parcimony [sic].
If we reduce waste where we can it should be to free resources for remunerative
spending. This applies to both public and private enterprise. . . Just
because depression means uncertainty, the private buyer is disposed to save
beyond normal. This special parcimony, with its cumulative results, needs
a special counterpoise. Otherwise we shall spend our substance in riotous
saving. We cannot afford to wait for the boll weevil or a drought to
rescue prices (Macgregor, 1932).

William Dampier, British scientist and first secretary to
the UK Agricultural Research Council, theorized the rules of “economical”
private spending and connected them to re-inflation:

Thus I conclude, first, that the nation and the individual
should, now as always, avoid waste, get the best value for their money, and
save, but only save as far as they can find remunerative new investments in
public works or private enterprise. Secondly, I think that, as long as we
are in danger of a further fall in the price level of primary commodities—an
increase in the value of money—it is dangerous to carry saving beyond that
amount (Dampier, 1932).

All of these letters to TheTimes of London preceded the beginning of what other scholars have identified as the
“Keynes-Hayek debate of 1932.” As we discuss below, they set the stage
and the parameters for that debate and the theoretical work that
followed. By distancing the experiences of citizens in the economic
conditions of the 1930s from those occasioned by the Great War, these letters
initiated the dissociation of patriotism from private parsimony.
Moreover, by playing on the denotations and connotations of the word “economy,”
they reversed the previously productive equation of parsimony with economy by
recognizing the equal accuracy of conditioning the value of saving money on the
successful functioning of the “economy” as a whole. By reframing the
problem of “uncertainty” from one that justified private hoarding to one that
entailed countervailing risks of over- and under-spending to be evaluated and
weighed through public argument they created an opportunity for Keynes and
Hayek to connect their theorizing activities to a live public controversy.
Nevertheless, the arguments articulated in these letters were linked to a
particular proposal of “price re-inflation,” which potentially limited the
generalizability of the economic explanations and justifications to other
situations. The subsequent contributions of Keynes and his colleagues and
Hayek and his colleagues opened the horizon for theorizing the implications of
economic uncertainty on consumption, saving, investment, and supply and demand
for money in ways that could be cited and applied in future controversies.

The Keynes-Hayek Debate in The Times of London

At the time of the exchange of letters, neither Hayek nor
Keynes had published the works of economic theory for which they would become
most famous. Hayek had just arrived in London from Austria in 1931,
taking an academic position at the London School of Economics. He had
published Monetary Theory and the Trade Cycle and Prices and
Production, which began the development of his monetary theory of business
cycles. Keynes, in his academic position at Cambridge and as an informal
governmental advisor, had published a series of pamphlets on specific economic
issues, his Treatise on Probability, his Treatise on Money, and a
volume of policy essays entitled Essays in Persuasion. The Treatise
on Money (1930) was the longest work of the group and most directly related
to political economy. It set out Keynes’s early views on the differences
in motivation between savings and investment which prevents their automatic
equalization in a credit money economy, as well as his attempt to formalize in
a set of equations how an economy moves from one price level to another
(Skidelsky, 2010, 70-72). Hayek had critiqued the Treatise on Money in
an August 1931 article in the journal Economica, to which Keynes replied
that the Treatise no longer represented his economic views. At
about the same time, Keynes changed the title of his October 1932 Cambridge
lecture series from “The Pure Theory of Money,” the subtitle of the first
volume of the Treatise, to “The Monetary Theory of Production”
(Skidelsky, 2010, 83).

Keynes was not the chief signatory to the letter that initiated
the debate on October 17. Rather, it was D. H. Macgregor, who had
submitted the October 13 letter that connected the October dispute over private
and public spending to the July 5 letter signed by 41 economists. The
style of much of the October 13 letter seems to reflect MacGregor’s concerns
and rhetorical strategy, but the latter half includes a brief unfolding of
Keynes’ convoluted theory of differential motives for savings and investment
and connects it to the demand for money.

The letter’s first paragraph accepts Hornby’s invitation to
develop a perspective on the problem of private spending, and claims that this
view is one with which most British economists would not disagree. Then
the text moves to the issue of patriotism and the comparison of the exigencies
of the War economy with the Depression economy. “In the period of the War
it was a patriotic duty for private citizens to cut their expenditure on the
purchase of consumable goods and services to the limit of their power” (MacGregor et al., 1932a). But the resources freed up were used by the
government to conduct war. “At the present time, the conditions are
entirely different” (MacGregor et al., 1932a). The retained
resources are not used for war, or, quite possibly, for any other productive
purpose. What characterizes the depression economy is paralyzing
uncertainty, or a lack of confidence, that discourages people both from buying
securities and from investing borrowed money in factories and machinery to make
consumer.

In attempting to explain why demand for consumer goods deserves
such a central role in the determination of national income, the letter draws
upon Keynes’ differential motivation position. It figures demand for
consumer goods as the starting point for decisions by the consumers to save
money that can be used for investment in future production (MacGregor et al., 1932a). This reverses the traditional ordering principle of
Say’s Law, which posits that supply calls forth its own demand, by imagining
that consumers plan for their own future consumption by directly or indirectly
making funds available to producers for capital purchases. An increase in
personal savings through “bank balances or even in the purchase of existing
securities,” then, would be associated with a decreased desire or propensity to
consume in the future. Thus, private “economy,” or hoarding of money,
“cuts down the national income by nearly as much as it cuts down consumption” because
“capital expenditures decisions are counting on the expected future demand”
(MacGregor et al., 1932a). Moreover, the complex reasons why
people hoard money may become disconnected from the basic desire to
consume. By moving in the direction of motives that are a response to
declining incomes, people who decide to hoard can cause an initial downturn to
snowball. This outcome returns the argument to its rhetorical
premise: “…to spend less money than we should like to do is not
patriotic” (Macgregor et al., 1932a). To the degree that
Chamberlain’s austerity policies are encouraging this kind of individual
behavior by higher taxes and tariffs, lower interest rates on war bonds, and
reduced expenditures on social welfare, it contributes to unpatriotic action
that threatens future growth.

Because public goods are subject to similar consumption decisions
as are private goods, this line of reasoning about the misguided nature of
hoarding applies to decisions of local governments to refrain from providing
essential services such as swimming pools, libraries, and museums. “They
will be ‘martyrs by mistake,’ and, in their martyrdom, will be injuring others
as well as themselves. Through their misdirected good will the mounting
wave of unemployment will be lifted still higher” (Macgregor et al., 1932b).
Thus, implicitly, localities can offset the effects of economic distress on
private spending by supplementing it with public expenditures that lead to a
consumable good or service.

The reply to this letter that appeared two days later in the London
Times of October 19 placed Hayek’s signature in a position second to that
of T. E. Gregory, the governor of the London School of Economics, but above that
of Arnold Plant and Lionel Robbins. Yet the organization of the letter
suggests Hayek’s substantial involvement in its composition, and a continuation
of his critique of Keynes’ theories in the Treatise on Money. Like
a debater who wants to make the areas of difference stand out in a short
presentation, the text divides the question into three major issues and
purports to set forth the precise points of disagreement between Hayek and
colleagues and Keynes and his associates. The first issue involves an
effort to preempt the differentiation of economy from parsimony that fueled
criticism of the British government’s encouragement of reduced
consumption. The text pledges agreement with the view that hoarding money
is deflationary, and deflation is not desirable in itself.

The statement of the second issue alleges a disagreement with
Keynes and associates about the desirability of focusing upon consumption
spending rather than on “real investment.” As noted previously, the
October 17 letter classified investment in existing securities as wasted social
expenditure because there would be no guarantee that the proceeds would not end
up in the pockets of brokers and sellers rather than used for production of new
goods. The letter links the uncertainty and loss of confidence in
financial circles resulting from the declining popularity of existing
securities to the unlikelihood of additional instruments being issued. “A
rise in the value of old securities is an indispensable preliminary to the
flotation of new issues” (Gregory et al., 1932). Even suggesting
the possibility that individual investors should abandon the stock market might
hurt financial confidence under current circumstances. “It is perilous in
the extreme to say anything which may still further weaken the habit of private
saving” (Gregory et al., 1932).

The final issue concerns a difference of opinion about the
relative investment capabilities of public and private agencies. Here the
signatories take advantage of the presumption given by many readers of The
Times of London to the soundness and impartiality of its editorial
opinions. On Monday, October 17, the editorial on “Economy and
Unemployment” restated the newspaper’s preference for lean government
programs. It indicts public employment on the grounds that the jobs are
too costly, and that those paying taxes for them will become unemployed because
higher taxes will discourage business and consumption. While ostensibly
agreeing with the Times editorial position, the October 19 letter
transforms the question of public means of promoting employment into an
assertion about the competency of public agencies to make any
investments. “We are of the opinion that many of the troubles of the
world at the present time are due to imprudent borrowing and spending on the
part of the public authorities. We do not desire to see a renewal of such
practices” (Gregory et al., 1932). Public debt is asserted to
inhibit adjustment to adverse economic conditions more than private debt and to
crowd out private borrowing. Thus any public investment that requires
bonding must be rejected, even if “people ‘feel they want’ such
amenities.” Governments also have the power to remove impediments to
trade and capital investments. They should do so if they hope for economic
revival (Gregory et al., 1932).

Those who have chronicled the Hayek-Keynes exchange in recent
times for its resonances with the current economic crisis have ignored the
publication of a third letter to TheTimes of London by
the Keynes group on October 21. This letter responds most directly to a
letter published on October 18 by Ernest Benn, a British publisher, writer, and
political publicist, and W. W. Paine, the general manager of Lloyds Bank,
Ltd. Benn, at least, gave his critics reasons to suspect that his
economic beliefs were carefully tailored to his current occupation. He had
found justification for state intervention when employed in the Ministry of
Munitions and Reconstruction, but supported “undiluted laissez faire” when he
started his publishing firm after the Great War (Abel, 1960, 11). The
letter from Benn and Paine claims to agree that people have a duty to spend,
but not on bonding community facilities like swimming pools, libraries, and
museums because they draw resources that would employ more people and impose a
debt burden on the population (Benn & Paine, 1932).

Yet the Keynes group letter also has something to say to the
Hayek group’s claim about the “crowding-out” effect of public investment on
alternative forms of employment. Whether that claim is grounded in
assumed limitations on an available pool of money or on a supply of physical
resources, it is “an illusion,” as Adam Smith recognized long ago. Most
of the value in a product, says the text, is found in the “brains, hands, and
capital equipment of the country” (Macgregor et al., 1932b). These
are not finite in the same sense that money or physical resource are because
they will not be used in the absence of a deliberate decision to produce. “They
simply do not come into existence.” Under the uncertainties created by
the current economic recession, capital investment in and production of capital
goods will not trade off with similar activities for consumption goods, but
will simply not be undertaken at all, idling both labor and capital (Macgregor et
al., 1932b). The equation of capital and consumption in relation to
production is indicated by the ease within which the letter adopts and adapts
the term “capital goods” from neoclassical economics to reinforce the
centrality of consumption practices. It does so through its
identification of capital as a “good.”

Recovering Hayek for Contemporary Practice

The Hayek-Keynes debate has been recollected and deployed
for partisan support or opposition. The uses of Keynes and Hayek as
oppositional strategy thus are adduced to bear upon the contemporary economic
crisis of the United States. At present, the Obama Administration is said
to follow Keynesian interventionary policy by using fiscal and monetary tools
to stimulate spending and investment. The critical ground opposing Obama
appears to be drawn from Hayek (particularly as extended by Milton Friedman).
The Federal Reserve is pursuing a policy of Quantitative Easing and expanding
the money supply to avoid a deflationary spiral and stagnation similar to the
Japanese economy, since its bubble burst in 1997. The reduction of the
value of the dollar raises prospects of inflation, when demand resumes.
Inflation is one way to adjust great debt burdens, paying national and international
creditors back with cheaper currency. Inflation sometimes transitions to
hyperinflation, a spiral of rising price expectations creates incentives for hoarding
and price hiking in anticipation that dollars received today will be worth less
tomorrow. High interest rates are the only way to disrupt such a spiral.
So, as Ebenstein argues,

[i]t is likely that at
some point the Fed will raise interest rates and curtail existing measures to
increase liquidity in financial institutions. Or it may allow prices to inflate.
The United States could be in for a double-dip recession in which economic
activity responds to the unprecedented fiscal and monetary stimulus but then
hits a wall as interest rates and prices rise. Hayek's adversary, Keynes,
recommended fiscal policy rather than monetary policy as the way to steer an
economy, and this seems to be the Obama administration's intention (Ebenstein,
2009) .

In Europe, an era of austerity has descended in order for
governments to create manoeuvring room for physical policy, while at the G20
summit, nations over split over United States’ cavalier treatment of the
dollar’s exchange value. Conservatives would limit government
intervention into any economic downturn and Hayek is sited as a source that
justifies such restraint; however, while Hayek was skeptical about central
planning generally, careful inspection of his theory in relation to the
articulation of constitutive practices theory nevertheless provides ample
grounds for boundary setting and regulation of capital industries—a quite
different matter.

Society for Hayek is formed from a multitude of individuals who succeed
“when their activities are mutually adjusted to one another” (Hayek,
1981). Adjustment works because people “ in society can successfully
pursue their ends because they know what to expect from their fellows” (Hayek,
1981). Individuals in society

“can successfully pursue their ends because they know
what to expect from their fellows. Their relations, in other words, show a
certain order. How such an order of the multifarious activities of
millions of men [and women] is produced or can be achieved is the central
problem of social theory and social policy” (Hayek, 1981)

The central theoretical question, thus, is how a social
order made up of “the multifarious activities of millions of men is produced or
can be achieved” (Hayek, 1981). Reciprocal expectations create an
on-going, experimental field of activities, we think, where the final product
is the collectively endowed practices of complex market experiments. This
premise celebrates the productive form of knowledge generation while at the
same time restricting the hubris of elite intervention. Hayek draws
support from this view from homologous arguments to human intervention into nature:

We could never produce a crystal by directly placing the
individual molecules from which it is built up. But we can create the
conditions under which such a crystal will form itself. If for that purpose we
make use of known forces, we can, however, not determine the position an
individual molecule will occupy within a crystal, or even the size or position
of the several crystals. Similarly, we can create the conditions under which a
biological organism will grow and develop. But all we can do is create conditions
favorable to that growth, and we are able to determine the resulting shape and
structure only within narrow limits. The same applies to spontaneous social
orders (Hayek, 1981).

The idea of spontaneous social order—in between design and
human invention--slips Hayek into alignment with Milton Friedman and
free-market ideologists from Reagan-Thatcher onward. As Beichman contends:
“because the planner cannot know relative costs and scarcities, the planned
economy will in fact be chaotic and vastly wasteful." Particularly,
his early Cold War text, Road to Serfdom, is celebrated among
conservatives as “one of the foundation texts” for the movement. Further,
“the collapse of communism and the end of the Cold War have proven the vitality
and prosperity of economic freedom. Markets are the norm in most countries,” (Beichman,
2000, 16) Beichman concludes. John Gray confirms the success of the Nobel
Laureate: “it turned out Hayek had been right all along, namely, that
socialist central planning would not only fail but that its failure would, for
the sake of regime survival, introduce dictatorship” (Beichman, 2000 [quoting
Gray], 16).

The epistemic basis for Hayek was based less upon a fully
articulated conservative ideology than on a strong presumption against restrictions
of freedom based upon abstract, extrapolated rules. The views are
grounded in Karl Popper’s modernist, falsifiable thinking. Indeed, “Hayek's
entire approach to economics, in line with the Austrian School, emphasized the
limited nature of knowledge” (Ross, 2004).

Yet Hayek does not ground market success and economic practice in
natural law theories of maximizing economic freedom at the expense of demanding
universal restrictions against state intervention; rather, he posits “slow
evolution” as a feature of evolving economic conditions. Markets ”must
continuously form and reform themselves,” he writes, “where only the
conditions conducive to their constant reconstitution have been shaped by
evolution. The genetic and the functional aspects can never be fully separated”
(Hayek, 1981). The experimental quality of self-reformation sustains
Hayek’s well-known animus against central planning, but it does not rule out
the need for timely intervention on the part of the state when the
self-adjusting processes of experimentation fail. What kind and upon what
grounds intervention is justified needs to be developed from the Austrian’s
views on the outer-boundaries of practice.

The evolutionary thrust for markets occurs in rule
following. Rules may be implicit to a practice that everyone pursues, but
no one is forced to think about, why individual pursuits produce a sustainable
and successful common system is less important than the deployment and use of
these norms and practices of deliberated conduct. Rules form in the
habits of individuals and collectives before reaching the stage of linguistic
articulation--when complexity yields tensions among common forms of imitation,
convention, and strategic manipulation. In sophisticated markets, issues form
over basic questions. As Hayek observes,

some such common rules the individuals will follow merely
because of the similarity of their environment, or, rather, because of the
similar manner in which this environment reflects itself in their minds. Others
they will all follow spontaneously because they are part of the common cultural
tradition of their society. But there are still others which it is necessary
that they be made to obey, since it would be in the interest of each individual
to disregard them, though the overall order will be formed only if the rule is
generally obeyed (Hayek, 1981)

At this outer boundary, common law is the preferred
vehicle of offsetting strategic manipulation because of its slow, piece by
piece testing over time. Hayek believes that nations that govern economic
exchange through common law rather than civil law are more successful
economically.

The reasons rules emerge from practice is that knowledge within a
market order is disbursed and distributed. As the Austrian economist
writes,

the knowledge of the circumstances of which we must make
use never exists in concentrated or integrated form but solely as the dispersed
bits of incomplete and frequently contradictory knowledge which all the
separate individuals possess (Hayek, 1945, 519)

Nevertheless, market agents are accorded a common sense
that adjusts prices to value with speed and efficiency to circumstances.
A growing abundance decreases price because more goods are to be found as
available; a growing scarcity increases price because fewer goods are
available. Thus, individual judgments reflect through combination the
price which itself functions as a signal of rising or decreasing
availability. Thus, even though “each entrepreneur operations within the
bounds of his unique understanding of a particular ‘locality’, price signals
encourage apparently independent entrepreneurial activities to become
harmonised” (Steele, 2001, 14).

The epistemic assumption is drawn from the classical distinction
between ratio cognoscendi and ratio essendi, that is knowledge provided by a
sign and knowledge of the cause of the facts at hand. The capacity of a
rational economic actor is limited by access, constrained by selection, and
narrowed by timeliness. Entrepreneurs do not need theoretical knowledge
to explain why a certain trajectory of choices is beginning to succeed and a
previous set no longer works. Rather, economic knowledge is base upon appraisal
of accumulating and converging signs in anticipation of a turn in the short and
in the long terms. Such situated practices of knowledge are classically
rhetorical, of course; in situations inviting deliberation leading to judgment
and action, rhetoric is the art of marshaling timely reasons that critical
appraise, properly motivate, and accord right standing in the choices at hand.
Prudence is its virtue, contingency its limits, and an effectively choosing
society its outcome. In this regard, Hayek’s knowledge agent acting as
entrepreneur is in line with classic Aristotelian rhetoric.

Modern theory offers altogether different opportunities and
constraints for theory and practice. Theorization is the lynchpin of macro
economic thinking that reads causes of economic behavior from “aggregate”
data. Aggregate data are signals that are displayed over time and
correlated to suggest economic success and failure in terms of meeting,
exceeding or falling short of expectations. The analysis of aggregates
through economic formula yields knowledge of cause and effects unavailable to
entrepreneurs seated in their situated choices of how to read behavior, set
expectations, and decide. Aggregates obscure more than they reveal,
however, because factors composing the aggregates may wash out creating the
appearance of an unchanged trend; but changes in make-up may signal turns that
are building to threshold levels, with unexpected changes startling private and
public planners alike who deploy aggregates to construct continuity of past
into future. Useful knowledge needed to negotiate contingent circumstances
“never exists in concentrated or integrated form but solely as the dispersed
bits of incomplete and frequently contradictory knowledge which all the
separate individuals possess” (Hayek, 1945, 519). Rhetorical weight then
is constituted in the subjective impressions of the relevance, trustworthiness,
and inter-reliability of the fragments. The rooting of judgment in singular
cognitive translation of sense impressions has positioned Hayek as a champion
of conservative individualism. For Keynes these sense impressions are
driven by “animal spirits” that are a feature of the herd, released from the
caution of the day and hunting in the wiles of darkness. Neither Hayek
nor Keynes find that individual entrepreneurs, investors, or consumers carry
out their activities with complete, exhaustive information; they disagree as to
where the knowledge may be found, in the welter of practices meshing together
rules for purposes of advantage or in the rules at play that can be deduced
from outcomes.

What is removed from sight in the positioning Hayek against
Keynes is the social nature of learning which extends beyond the isolated
individual at point of judgment to the formation of common sense over and
against theory. Hayek concludes,

We need to remember only how much we have to learn in any
occupation after we have completed our theoretical training, how big a part of
our working life we spend learning particular jobs, and how valuable an asset
in all walks of life is knowledge of people, of local conditions, and of special
circumstances (Hayek, 1945, 522)

What is key to economic activity is not only making up
expectations that are prudent but also reading them against expectations of
others upon whose satisfactions work and reward depend. So much does he
depend upon this learning, that self-positioning occurs best in a world
unquestioned and taken for granted. Prices send signals. Price system
itself is

a kind of machinery for registering change, or a system of
telecommunications which enables individual producers to watch merely the
movement of a few pointers, as an engineer might watch the hands of a few
dials, in order to adjust their activities to changes of which they may never
know more than is reflected in the price movement (Hayek, 1937)

One can build upon habits through judgment by following
the successful habits of practices and institutions that have built up over
time and furnish foundations. Those who cultivate the ability to
critically appraise certain conditions or circumstances inviting intervention,
even though tested by competition, will over the long run win. Yet, the very
taken-for-grantedness of reading signals as indicators presupposes a social
world that underwrites the communication practices of the markets.

The Austrian view has a social, rather than purely individualist
basis, because it borrows its basic ideas of practical reason from Aristotle’s
understanding of the virtues demanded by successfully managing household
economy—a term broader than individual family or city-state circumstances.
Catallaxy--the order brought about by the mutual adjustment of many individual
economies in a market--is at the roots of a knowledge economy where the grounds
of prudence are woven into the cultures of practices, as the community
addresses—presents, evaluates and judges--special cases with particular
knowledge from a variety of interested sources. Hayek finds Aristotle’s
Nicomachean Ethics compelling:

Nor is Prudence a knowledge of general principles only: it
must also take account of particular facts, since it is concerned with action,
and action deals with particular things. This is why men who are ignorant of
general principles are sometimes more successful in action than others who know
them: for instance, if a man knows that light meat is easily digested and
therefore wholesome, but does not know what kinds of meat are light, he will
not be so likely to restore you to health as a man who merely knows that
chicken is wholesome; and in other matters men of experience are more
successful than theorists. And Prudence is concerned with action, so one
requires both forms of it, or indeed knowledge of particular facts even more
than knowledge of general principles. Though here too there must be some
supreme directing faculty (Aristotle, 1141b7) (Hayek, 1945)

Ratio essendi in situations requiring action trumps ratio cognoscendi, which is powerless. Note though that the
virtuous deliberations are not solitary; rather, Aristotle’s rhetoric is a
practical art, too, where the double-sided quality of signs point in conflicting
directions and a practical art is necessary to sort, read, arrange, stylize,
remember and order the common experiences through adjusting symbols in the
interests of restraining or releasing action. Rhetoric offers an art of
collaboration, not reducible to individual cognition. Trust in practical
reasoning takes its turns on the requirements to build confidence in lending
and investing, the very strategies that enable expanding market activities.

Capital investment carries forward classical epistemic traditions
into modern thinking. Capital investment is based upon expectations truly
successful for the longer-term anticipation of wealth generation and apparently
successful with the short-term response to opportunity. As Steele
explains:

capital investment permits 'roundabout' methods of
production (for example, machines are produced in order that commodities can be
produced; or land is drained in order that commodities may be grown). After a
period of gestation, those capital investments yield earnings from the sale of
the commodities whose production they make possible. 'Shallow' investments
bring commodities to the market relatively quickly, but 'deep' (or, in modern
terminology, highly capital-intensive) investments are technically (though not
necessarily economically) more productive (Steele, 2001, 31).

If capital is directed through planning, the policy will
distort the sorting process by which genuine opportunities will attract
long-term investment. Short-term stimuli will systematically distort
investment as risk takers adjust their standing to pay-offs made opportune by
government stimulus, thereby making “real recovery” less likely or longer to
achieve. These views underscored Hayek’s view of economic recession,
which occurs

when an investment boom is sustained by easy credit, the
implication is that investments are insufficiently covered by saving;
consumption is too high and shortages will accumulate. A painful retrenchment
is inevitable (Steele, 2001, 32)

It seems to us that state central planning is not the only
source of systematically distorted communication. Rather, in the present
recession, the state operated with large banks to enable a system underwritten
by cronyism—reciprocal benefit of large institutions in the interest of power
and profit at the expense of national and international investors.
Conservative ideology was deployed as a universal to support the view that all
state deregulation would result in more perfectly functioning free
markets—removing protections against speculation that have been in effect since
the last outrageous episode of the Great Depression. Yet, unlike the
Depression the freed up market forces were backed by explicit and implicit
government guarantees of a bailout, should their appetites get too large—a
bailout at the expense of the taxpayers. This situation moved moral hazard to
the realm of a social rather than individual problem. Moral hazard occurs when
leverage is encouraged because there are only benefits to be had by risk taking
because an exogenous agent has guaranteed to pick up losses. Moral hazard
was a nineteenth century issue for the insurance industry. Underwriters
worried that if an individual were insured to a high level, then the motive to
exercise normal caution would be reduced. Insurance would create a
moral hazard by motivating bad judgments in excessive risk-taking.

Hayek’s thinking about distorting capital investment
through systems of false signals inviting investment now can be extended to big
banks whose derivatives are not regulated and so out of site of government, yet
at the same time government has an implicit promise to provide rescue.

Two cases are relevant. First, Fannie Mae and
Freddie Mac were started as government agencies, but had been privatized. Still
their mortgage investment pools were attractive because as quasi-government
agencies; they were backed by the US federal government. Second,
derivatives are volatile new instruments of financial engineering.
Leveraging investments may make the formulas volatile. In 1997, a Wall
Street bank failure was mitigated by the action of the US federal
government. In 2007, the added argument was “too big to fail,” which
assured investors of the likelihood of a bailout, especially after the
consequences of the Lehman Brothers bankruptcy were demonstrated. The
partnership between capital and government created moral hazards on a vast
scale. Just as conservative advocates now blame Roosevelt for the length and
breadth of the depression through interventionist fiscal and monetary policies,
so they argue that current Keynesian interventions are failing—as predicted by
Hayek. Meghnad Desai and Robert Skidelsky of the Manchester Guardian,
for example, conclude of quantitative easing:

Wherever the money has gone, it is not into the real
economy. A similar situation prevails in the US where, as Alan Greenspan
pointed out in the Financial Times of 6 October, corporates are using the money
supply to buy liquid assets rather than "real" investments. Consumers
are also not spending but saving to deleverage, and even so consumer
indebtedness is still dire. Much more deleveraging will have to be done before
the negative wealth effect will vanish and spending resume . This is very much what Hayek's theory leads one to expect. The
crisis, he says, occurs because there has been a long run of cheap credit
resulting in malinvestments, like today's sub-prime mortgages. Expectations of
lending banks change, we have a reversal of cheap credit and the boom collapses
(Desai & Skidelsky, 2010).

While the analogy appears strong, a jump to
non-intervention into market activities remains unwarranted, precisely because
the ideology of apparent deregulation set the grounds for a mixed government-private
distortion of risk signals. Further, the articulation of change from war
to peacetime economy does not speak to the habits of consumption and
uncertainty that mark the tensions of a global economy. All analogies are
limited, to be sure; however, what disciplinary purity and ideological
polarization accomplish by perfecting difference is to conceal key common
grounds useful for understanding economic theories and practices in emergence
and for achieving an informed policy consensus.

Conclusion: Then and Now

A close reading of the actual exchange between the Keynes
group and the Hayek group in the context of the letters in The Times of
London that appeared before and concurrently with the exchange reveals that
the positions developed, when appropriated by contemporary economists as clear
and decisive arguments for or against practices like government stimulus or
quantitative monetary easing, are considerably more ambiguous than
claimed. First, both groups orient their position in opposition to the
previously valued British figure of the patriotic citizen who either
hoards cash or gives it up in the forms of taxes, tariffs, or reduced bond
income because these actions are said to be in the public interest. Both
see this figuration as an anachronistic extension of wartime attitudes that
threatens economic instability by inducing deflationary spirals. This
point of agreement is potentially devastating to contemporary proposals to cut
government budgets by more than 50% in the interest of paying off national
debts. Second, neither group is persuaded to endorse the position that
minimizing government expenditures is always justified by the “principles of
economy” that conflate the economic model of exchange processes with the
pursuit of efficiency in resource use to create a “fundamental economic
law.” Both the Hayek and Keynes groups worry not about inefficiency per
se, but instances where public authorities move outside their areas of competency to undertake projects that are not closely connected to encouraging either
private consumption or investment. They do not participate in the broader
presumption of “economy” and its radical opponents that government always or
never wastes money, and thus refuses to grant or deny legitimacy to any particular
activities. Finally, both groups recognize the inherent role of uncertainty in economic decision-making, and thus the need for deliberation, argument, and
collective choice at various moments in economic life. Hayek does not think
an economic system is an automatic decision making process. While they may
differ strongly on the sources of uncertainty, both the Hayek group and the
Keynes group preserve its contingent nature and constitutive force.

This finding corresponds to G. R. Steele’s work in the interpretive
history of economics as a discipline. Steele distinguishes the arguments
of these modern economists from classical, natural law beginnings. “Since all
human action is directed towards changing some future state, uncertainty must
pervade the outcome of every action that resides within the context of other
people's actions” (Steele, 2001, 162). The first order question of
uncertainty, of course, belongs to the market situated entrepreneur who must
decide whether to buy or sell, or to pay more or less for a good, with capital
to be used now or saved for later, in anticipation of producing more goods or
simply increasing expected yield through higher prices. The second order
uncertainty extends to the investor who must decide whether to increase the
levels of risk-taking or withdraw from market activity, to go with or against
the general trends of the crowd, to continue or to cash in at every turn. Then
too there is a third factor that produces a new level of uncertainty in the
very act of trying to reduce it. Economists gather data and craft models,
make predictions and explain past outcomes. Practical judgments and theoretical
models together push a third level of uncertainty, both in the comparative
merits of theory and the new techniques of financial engineering built and
certified by major institutions and the state. It is for these reasons,
all rooted in the probability revolution of late 19th and 20th century science,
that neo-classical economics assumes an equilibrium which, in fact for Keynes
and Hayek, markets struggle always to achieve and whose continuity always
remains uncertain. Keynes and Hayek both remind us of the contingent
qualities of market practices, investment strategies, and theoretical models
and apparatuses. How issues of contingency are addressed defines
generative rhetorics that influence the left and right politics of national
governments that during times of crisis, in the Great Depression and in the
current Great Recession, vary widely. A rhetorical approach to economics
addresses through appreciation and critique the uncertainties constitutive of
the times as well as the re-articulation of such moments when public values,
theoretical models, and market practices are in change. Critical rhetoric work
extends and complicates—rather than purifies and uses--economic debates.
In the case of the 1932 debates, we find areas of possible agreements between
theorists, even while leaving room for differences. Close, constructive textual
readings are necessary to reconstruct contingencies, block conversion of
articulated positions to universal theoretical principles, and recollect and
reconstruct the fuller, informed range of discussion in the interests of
competent public policy.

In the end, partisan and ideological uses of the Keynes-Hayek
debate to fortify the case against state intervention allow market fraud to go
unchecked. Free-market slogans legitimated a scheme by the state and
banks to render liquid the American housing market, creating a new debtor
class. In the last two years, 4 million Americans have been thrown out of
their houses, a quarter of all home owners (19 million families) owe more on
their homes than the market value, and credit card bankruptcy laws were revised
in 2005 in anticipation of the unsustainability of the bubble. Hayek
demanded the protection of common law against the planning of the state.
In the recent debt bubble, the government’s supposed commitment to free
enterprise in fact engaged in a planning scheme that resulted in a massive
transfer of wealth, a credit crunch, and a huge transfer of home ownership back
to the banks. Systematically distorted communication transforms the
taken-for-granted signal sending qualities of the market into lures, traps, and
eventually triumphs of planned wealth shifts. The problem, of course, is
that these are not sustainable and without Keynesian intervention the triumph
may be so complete that recovery may be long in arriving. A complete
rhetoric is brought into play only when ratio essendi links with a powerful,
critical counterpart in ratio cognoscendi—the shared common grounds of contingent
policy choice in a political economy.